By Elena Rakova

Belarus needs green field privatization i.e. foreign direct investments, which our government have long been craving for. I say “direct”, because portfolio investments will not bring foreign currency to our country in the long term. In order to attract FDI we need a favorable business climate, when many rating agencies will agree in their estimates of our country, and when similar estimates will be given by local and international consultants who know the situation in the country firsthand. In order to attract FDI the Balkan countries had carried out a real liberalization of their business environments (from opening a business and developing it to its closure). More than that, they provided potential investors with lax tax policies, tax breaks, and benefits. It is worth mentioning that these countries are also carrying out democratic reforms and getting closer to Europe, which makes them more attractive for foreign investments as well.

Let us assume, however, that Belarus can attract foreign investments with the help of just several forums and a public relations campaign. Will they really bring foreign money and direct investments to the country, or will it be vice versa?

Production can hardly be very profitable in Belarus (low return on investment and low profit margins, high risks, etc.) so investments primarily go into retail, construction, and service sector. Construction of several new hypermarkets (Russian or European, doesn’t matter) will make import grow. Yes, import, because that’s what these hypermarkets (boutiques, supermarkets, etc.) will sell. They will protect and lobby their right to sell imports not only because Belarusian goods are worse (or more expensive), but because there are different contracts and foreign business interests behind international retail networks. Construction of hotels, entertainment centers, and office buildings will bring, besides investments, a considerable growth of imports: building materials, construction equipment, decoration materials, furniture, etc.

That is why we can talk as much as we want about foreign investments influx into our country – in most of the cases these investments don’t cause the export to grow (and a stable influx of foreign currency into Belarus as well), but rather a growth in imports (that our authorities are trying to struggle against). 
So what privatization and what FDI do we need for Belarus?

Experience tells us that the best privatization is an export-oriented privatization, which means privatization of existing production facilities by international companies. There is a theory in economic science about that: the export-led growth. Why?

It is easier to produce for international companies: they have necessary technologies, skills, capital and other factors of production.

It is easier to sell for international companies: everybody in the global market knows what is a Samsung microwave oven or a LG TV-set; and nobody knows the local brands (like Horizont or Atlant). Whatever our plans and dreams are, nobody will buy our fridges abroad.

Export-oriented international companies will develop the production and increase it, because global market is infinitely bigger than Belarusian market. An export-oriented company has a much larger market and a much higher potential.

Any country needs export, it is vitally important. It brings foreign currency to finance import and makes the balance of payments more stable. International companies can do that.

An export-oriented company has, as a rule, a bigger profit margin and a bigger development potential (which means higher taxes, and new working places, and more valuable skills obtained by the workers).
Finally, export-oriented companies tend to be more competitive. They have to compete in the global market, which makes them increase quality, invest in R&D, cut their costs, etc. A company that is oriented to the local market will try to lobby government laws and regulations aimed at protectionism, import substitution, and other measures that will make both the company and the country poorer, and not richer, in the long term.

Privatization and following economic development in Poland and Slovakia seems to be more stable than economic growth in Baltic countries, which was stimulated by not growth of export but rather rise in domestic consumption (fueled by cheap loans provided by foreign banks). More than that, Polish government had initially made the same mistakes as we are making now: they tried to subsidize Polish companies that could produce but couldn’t sell. Polish companies just didn’t have resources necessary for competitive marketing (which is not only the art of selling).

Only export-led growth can lead to long-term sustainable development of a country, competitive production industries, getting closer to economic standards of the EU, and country’s integration into the global market and global division of labor. And it is not necessary to produce the end-product: international companies can produce unfinished products and sell them to the global market.
Therefore, Belarus needs not only foreign direct investments and not only privatization (although the privatization of banking, insurance, and infrastructural sectors should be warmly welcomed). We need investments into production facilities, both into new and existing ones, which will allow us to make them export-oriented and build ourselves into the global division of labor system.

Belarus doesn’t have that many production facilities capable of exporting their products to the global market. Many manufacturers are potentially capable of that but big investments are needed. These investments, however, would hardly be profitable under current prices of assets and labor conditions (salaries, taxes, etc.). As a result, there is basically no demand for privatization and no supply. We have the same situation with green field privatization. It is risky and not very profitable to invest into today’s Belarus.

Let us think by ourselves. Which factors define privatization or influx of foreign investors into a country?
In the first place it is information about the country, its economic development, geographic position, and so on. So what a foreign investor will see here? Yes, Belarus is the geographic center of Europe, it has qualified labor force, clean streets, etc. But there is also a lot of negative information, myths, and stereotypes about our country. And so our investor decided to see everything by himself. He will then face the 100 euro visa, half-empty airport, and other “discoveries”. After that he will visit local consulting, analytical, and international companies and after several meetings will obtain real information about the rules of the game, risks, stability, and so on. It appears now that no investment form in London can counteract the existing practices of confiscation, huge fines, puppet courts, etc. How can we compete in attracting foreign investments with such countires as Romania, Montenegro, or Serbia? Belarusian officials need to visit these countries and learn their experience of building a positive image of a country and creating attractive economic conditions.

Then the potential investor analyses global situation. Currently it is not favorable for investment and experts are expecting the decrease in investment activity around the world. Today money are too valuable to invest them. And once again, how can Belarus compete with other countries of the region under such conditions?

Then the investor looks at what is offered to be privatized in this or that country, what are the conditions and future benefits of new projects. And once again, there is no real supply of opportunities for investments in our country (we do not take into account backroom negotiations with some investors from exotic countries – in order to talk about a tendency we need plans and rules of the game issued by the government available to the public, not to some people in Minsk or London). Selling agreement of a controlling interest in a company is made with many additional conditions, the price of the shares is extremely high, etc. That is why we can only talk about pinpoint privatization of some of the best Belarusians assets. Foreign investments are still being attracted into construction, retail, and banking sectors. In doesn’t create a basis for country’s development, it won’t bring us new technologies, capital, knowhow, and will not integrate us into the global economy.

Such attraction of FDI policy will not bring the much-wanted foreign currency or considerable capital to Belarus and will not change the structure of export (more than half of it now is raw materials). The country needs new economic policy and new people that will be capable of carrying it out. Alas, history shows us that governments start to carry out market reforms only when there is nothing left to lose, and the more desperate the situation is the more “market” the reforms are. In this sense we definitely have more place to fall, although the global economic crisis can catalyze the end of “Belarusian economic miracle”.